Saturday, March 12, 2016

We Need to Talk about Frank (Fetter)

By Matthew McCaffrey

If we were to ask readers to list the most important Austrian economists, most people would probably name Menger, Mises, Hayek, and Rothbard. But probably very few would think to include Frank Albert Fetter (1863–1949) among the luminaries of the tradition. This is unfortunate, because Fetter’s work, although neglected, is actually the source of some of the greatest insights in Austrian economics, and deeply influenced Mises, Rothbard, and others.

Fetter is sometimes called a “forgotten giant” of the Austrian school, and for good reason. He was one of the most widely-read economists of his day, and he frequently debated the biggest names in economics. His achievements earned him a place as chairman of the Department of Economics and Social Institutions at Princeton, where he spent most of his career (a certain contemporary Princeton economist could learn a thing or two from Fetter).

In fact, so respected was Fetter that when he presented a paper at the 1926 meeting of the American Economic Association, his work was commented on by no less than six major scholars: Irving Fisher, Wesley Clair Mitchell, Waldo Mitchell, Melchior Palyi, Frank Knight, and statistician Karl C. Karsten. At the meeting, Wesley C. Mitchell even confidently remarked that Fetter’s ideas were the basis of “critical evaluation which has been going on for two decades, and which will doubtless continue for years to come.” Sadly, his confidence was unjustified. Only a few years later, in the wake of revolutionary changes in economics, Fetter’s once-influential ideas were all but forgotten.

His work was rescued, however, through the efforts of other Austrians. Mises cited Fetter’s work in Human Action, and it was there Rothbard discovered Fetter’s name while writing Man, Economy, and State. Rothbard immediately grasped the importance of Fetter’s research, and went on to integrate Fetter’s ideas into his own treatise. Rothbard eventually edited a collection of Fetter’s writings on capital, interest, and rent (here), thereby saving them from the dustbin of history.

However, today Fetter remains relatively unknown, even in Austrian circles. This is especially odd considering that Austrians tend to emphasize the study of the history of economic thought.

Yet Fetter was a vital force in Austrian economics in the early part of the twentieth century. In fact, his textbookEconomic Principles was the first comprehensive treatise in the Austrian tradition, and provided a blueprint for later works like Human Action and Man, Economy, and State.

Why the neglect of his ideas then? Well, I’d suggest that Fetter is a case study in how brilliant ideas and professional success are often unable to stop the advance of bad ideas whose time has come.

In addition, Fetter did not draw on the same ideological passion that characterized Mises or Rothbard’s works. Although a supporter of free markets, Fetter was neither the “last knight of liberalism” nor a founder of modern libertarianism. His work was mainly confined to economics, making it less appealing to modern audiences interested in free-market advocacy.

My own interest in Fetter involves his work on entrepreneurship and the theory of the firm. Here too Fetter was ahead of his time. He was perhaps the first to elaborate the theory of entrepreneurial judgment later developed by Frank Knight. He even anticipated Knight’s famous distinction between “risk” and “uncertainty,” which Mises would adapt and develop in his own way. These topics remain prominent in contemporary Austrian work on entrepreneurship, but Fetter can be connected to current research in management as well. You can read more about all these ideas here.

Lastly, Fetter played a vital role in spreading Austrian price theory in the United States. His writings on this broad topic, especially in his textbooks, are still accessible and fascinating over a century later. They’re also key for understanding why the Austrian tradition is so important. People often forget that the uniqueness of Austrian economics lies in its “mundane” approach to human action, especially to price theory. That’s why Austrians focus so much on exploring fundamental issues like money, economic calculation, capital, interest, and entrepreneurial profit. Without these concepts, there isn’t really much economics left to study.

It’s easy to get caught up reading about exciting topics like anarchist political economy, and harder to remember that exploring them depends crucially on our understanding of the foundations of economics. Writers like Fetter can do a lot to help us think through these and countless other problems.